Though Cowards Flinch

I am a Marxian political economist, but in my last posting I found myself in the paradoxical position of having to explain insights of an eminent bourgeois economist which seemed to have been lost in the current political climate. The responses to my posting indicate the extent to which points which were a standard part of economics training in the immediate postwar period are now no longer understood.

I had written:

“But all this evades the real cause of public deficit: the growing financial assets of the international rentier class. This can ultimately be dealt with only by one of 3 expropriation processes”

To which a poster replied

Sorry if this has already been assaulted in earlier comments. But I would need this explained to some degree. In a narrow technocratic sense, the deficit in the UK has emerged because high spending that was reliant on the continued extraction of value from asset-boom based activities was suddenly uncovered. Financial wealth cratered, and so did the government’s – they don’t seem to be in opposition to one another.

We have to understand what is happening in the context of the long historical development of capitalism in Britain.

In the early phase the rentier class was small and most capitalists directly owned their own businesses. For them savings and investment were the same thing. The Fairfield family could decide to save by putting their profits into a big new dockside crane for example.

Once you got the dominance of joint stock companies the capitalist class took on two forms : the rentier owners of shares, and the managerial class that actually ran firms. Saving and investment then became separated into two different activities by different groups of people. This was the situation when Keynes was writing. This, then relatively new, structure of the economy had created an inherent tendancy towards instability and recession which became painfully evident after the Great War.

Kenyes attributes this to what he called the ‘pardox of thrift’. If the rentier class chose to reduce its consumption and save, this saving was by itself quite disconnected from investment. Investment decisions were independently made by a distinct group of people – the managers – based on their perceptions of future sales. Instead of decisions to save driving investment, the process went the other way. Investment expenditure
by firms regulated the level of savings. Investment by firms caused national income to rise until it created the savings necessary to finance it.

Any attempt to stimulate investment by encouraging more saving — the orthodox response to the crash of 1929 — would be counter productive. Lower consumption expenditure would reduce sales, firms would have to borrow to meet current costs. They would in consequence cut forward investment and lay people off, and the recession would get deeper.

During the 1930s Keynes was ignored but the Labour government post 1945 took his insights onboard. They established a new economic model in which steeply progressive income taxes and inheritance taxes would diminish the savings of the rentier class with the state would use the resulting revenue to take on a leading role in investment. This model which lasted for some 25 to 30 years gave rise to a period of rapid economic growth in which real wages showed the biggest sustained rise since industrialisation.

The existence of such a large state sector, in combination with a strong trade union movement, had, by the mid-1970s, seriously threatened the continued viability of the remaining capitalist sections of the economy, resulting in a major crisis of profitability. There was a lively debate within British Social Democracy about what to do. Should the crisis be resolved by more vigorous state controls over prices and incomes whilst retaining the existing private sector? Should it be resolved by extending state ownership and using a new state investment bank to fund investment?

The Labour Party was effectively paralysed with indecision and was replaced in 1979 by a radical neo-liberal government headed by Mrs Thatcher. This reversed many of the social democratic changes made after 1945 with the explicit aim of returning to a classical liberal capitalist economy. The immediate impact of her policies was what one would have expected on Keynesian grounds a slump of almost 1930s magnitude. Official unemployment rose to over 3 million, despite repeated massaging downwards of the definitions of unemployment.

Manufacturing industry, and the country’s ability to export manufactured goods was drastically hit.

From the early 90s though a new model of growth seemed to have estabilished itself in the Anglo-American economies, which combined a sharp polarisation of income distribution with rising consumer expenditure financed on credit. This model allowed the savings of the rentier class
to be balanced by the rising indebtedness of the lower classes and the state. The crisis of 2008 hit when the indebtedness of the lower classes hit its limit.

In principle, the US and UK could retain a rentier class with growing savings if they could export capital, — the Cecil Rhodes or Edwardian imperialist model. But to do that they would require a trade surplus. But the policies followed since the 1980s have led to a rundown of real capital stock and the productive skills that would be required for a trade surplus.